The History of Depreciation Through 1986

Below is a general overview of the history of depreciation through 1986. Included are major changes or additions to rules and regulations concerning the ways in which depreciation is determined and allowed.

1934: Up to this point the estimation of the useful lives of depreciable assets was not very regulated. Then, during the Great Depression, the Treasury tightened controls to help finance public works. They began requiring taxpayers to prove that they were selecting appropriate useful lives for their depreciable assets.

1942: Bulletin F. Result of the Revenue Act, 1942 introduced gain from the sale of depreciable business property as “Capital Gain”. This had the effect of slowing depreciation deduction to reduce the effect of Capital Gains.

1954: Congress authorized the use of accelerated depreciation methods, including 200% declining balance and sum of the years-digits. The availability of the accelerated methods of depreciation encouraged taxpayers to buy and/or build new plants and equipment.

1962: Bulletin F Abandoned & Special Guidelines were adopted for the examination of depreciation deductions. These guidelines were issued to reduce taxpayer – IRS disagreements over selected recovery periods and to liberalize depreciation rates. The new rate table was based upon broad industry classes of assets. The 1962 Revenue Act also included a provision for taxing of the gain on sale of depreciable property as ordinary income.

1971: The class life asset depreciation range system (ADR) was introduced. This provided for class lives based upon broad classes of assets and a range from which a life could be selected for depreciation. Initially ADR only covered Machinery & Equipment, but the 1971 Revenue Act gave ADR legal authority which expanded it to include buildings and land improvements.

1981: The Accelerated Cost Recovery System (ACRS) was designed to simplify cost and recovery and stimulate capital formation. Congress wanted to reduce the size of the deficit and real estate tax shelters.

1984:Tax Reform Act of 1984 slowed the cost recovery of Real Property placed in service after 3/15/1984. Cost recovery on “luxury” automobiles was slowed with an annual cap and section 280F “listed” property was made less attractive when such property was used 50% or less for business.

1986: Modified Accelerated Cost Recovery System (MACRS) was an entirely new system for tangible property placed into service after 1986. Under MACRS, the cost is recovered over a number of years based on the asset’s class. One of the major benefits of MACRS was to allow companies to take more depreciation in the beginning of an asset’s life to increase the net present value of capital purchases and help stimulate spending.

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